3 6 4 CATCHWORDS Bankruptcy - whether proceeds from sale of real property resulting from partition proceedings is property "recovered or preserved" ~- preferential payment to indemnifying creditors. Bankruptcy Act 1966 s.109 RE: JOHN HOWARD PASSMORE, a bankrupt EX PARTE: 'THE_OFF TRU: N RUPTCY (as trustee of the property of John Howard Passmore, a bankrupt) No. 890 of 1980 Northrop J. Melbourne 9 'November 1984 N THE FED COURT OF AUS EXERCISING FEDERAL JURISDICTION IN BANKRUPTCY No. 890 of 1980 —Se ww BANKRUPTCY DISTRICT OF VICTORIA RE: JOHN HOWARD PASSMORE, a bankrupt EX PARTE: THE OFFICIAL TRUSTEE IN BANKRUPTCY (as trustee of the property of John Howard Passmore, a bankrupt) CORAM: Northrop J. DATE: 9 November 1984 PLACE: Melbourne THE COURT ORDERS THAT: 1. The sum of $12,780.87 (being the applicant's share of the net proceeds of sale of the property situate at and known as Lot 2, Temple Road, Belgrave South, being the whole of the land more particularly described in Certificate of Title Volume 8955 Folio 408, registered as at the date of the bankruptcy in the names of the bankrupt and Rosalie Alma Passmore as joint proprietors) constitutes property recovered or preserved by means of an indemnity for costs of litigation given by creditors of the estate, namely Burkett Industrial Equipment Pty. Ltd., James Neill (Australia) Pty. Ltd. (trading as "Neill Tools"), James Neill (Australia) Pty. Ltd. (trading as "Thomas C. Brown & Co.") and F.H. Prager & Co. Pty. Ltd. (hereinafter called "the indemnifying creditors"). After payment thereout of :- (1) the remuneration percentages and other necessary disbursements by the applicant as trustee of the estate herein of and incidental to the sum of $12,780.87 hereinafter referred to; (ii) the fees and percentages payable to the Registrar in Bankruptcy insofar as they relate to the said sum of $12,780.87; and (1ii) the applicant's taxed costs of this application, two thirds of the balance of the said sum of $12,780.87 be paid in partial discharge of the claims of the indemnifying creditors who shall rank rateably in accordance with the amount of the proved debt of each such creditor. N_THE COURT US! IA Is FERAL SD ON ZN_BANKRUPTCY No. 890 of 1980 ww www RUPTCY DISTRICT OF V R RE: JOHN HOWARD PASSMORE, a bankrupt EX PARTE: I TR I RUPTCY (as trustee of the property of John Howard Passmore, a bankrupt) CORAM: Northrop J. DATE: 9 November 1984 PLACE: Melbourne REASO) OR JUDG! John Howard Passmore, upon his own petition became a bankrupt on 5 September 1980. At that time he was a joint tenant with his wife of a dwelling situate at and known as Lot 2, Temple Road, Belgrave South, hereinafter called "the land". The land is more particularly described in Certificate of Title Volume 8955 Folio 408. At the date of the bankruptcy the land was registered in the names of the bankrupt and his wife, Rosalie Alma Passmore, as joint proprietors. On 5 September 1980 the interest of the bankrupt in the land became vested in the Official Trustee in Bankruptcy pursuant to sub-section 58(1) of the nk te Act 1966, ("the Act"). Thereupon the Official Trustee hereinafter called "the Applicant",and Mrs. Passmore became tenants in common in equal shares of the land. Thereafter Mrs. Passmore refused to purchase the Applicant's interest in the land and refused to agree to the sale of the land and a distribution of the proceeds between them in equal shares. Some 37 unsecured creditors proved debts against the estate of the debtor and normally those debts would rank equally; see s.108 of the Act. Division 2 of Part VI of the Act, comprising sections 108 to 144 inclusive, contains provisions relating to the order of payment of debts. Section 109 as presently in operation which relates to priority payments was first inserted into the Act by s.51 Bankruptcy Amendment Act 1980. The same section repealed the then existing 5.109 and substituted the present 5.109. Sub-section 51(2) of the 1980 Act provided that the provisions of the repealed :8.109 continued to apply in relation to the administration of the estate of a bankrupt who became bankrupt before the commencement of s.51 of the 1980 Act as if the repealed 8.109 had not been repealed. Section 51 of the 1980 Act came into operation on 1 February 1981, after the bankrupt had become bankrupt on 5 September 1980. Accordingly for present Purposes the relevant sub-section is sub-section (6) of the unamended section 109. Sub-section 109(6) is set out: "(6.) Where property has been recovered or preserved by means of an indemnity for costs of litigation given by any creditor or creditors, the Court may, upon the application of the trustee or a creditor, make such order as it thinks just and equitable with respect to the distribution of the proceeds of that property with a view to giving the indemnifying creditor or creditors an advantage over other creditors in consideration of the risk run by him or them in giving the indemnity." It should be noted that for the relevant words of that sub-section are "Where property has been recovered or preserved by means of an indemnity for costs of litigation given by ... creditors ..." 3; (emphasis added). The corresponding provision presently in operation is sub-section 109(10) where the relevant words are: "Where property has been recovered, realised or preserved by means of an indemnity for costs of litigation given by ... creditors ..." ; (emphasis added). The word "realised" has been inserted in what can be described as the condition precedent to the Court having power to make an order. Reference is made to the corresponding provision in operation before the Act of 1966. That provision was contained in sub-section 84(2) of the Bankruptcy Act 1924 as amended, hereinafter called the 1924 Act. That sub-section is set out: "(2.) Where assets in any estate have been recovered by means of an indemnity for costs of litigation given by certain creditors, the Court may make such order as it deems just with respect to the distribution of those assets with a view to giving the indemnifying creditors an advantage over others in consideration of the risk run by them in giving the indemnity" ; (emphasis added). That sub-section did not include either of the words "preserved" or "realised". On 7 August 1981 notice of a meeting of creditors of the bankrupt was given to the creditors. The purpose of the meeting was to discuss and vote on the following resolution: "That subject to the provision of satisfactory indemnities, the Official Receiver be authorised to take such action as he considers necessary, including partitioning proceedings, to realise the estate's interest in the property situated at Temples Road, South Belgrave, more particularly described in Certificate of Title Volume 8955 Folio 408." The use of the word "realise" should be noted. The notice of meeting set out a number of facts for consideration by the creditors including a reference to the bankrupt's interest in the land, the estimated value of that interest which at the least was estimated to be $10,900.00, the refusal of Mrs. Passmore to purchase the bankrupt's equity in the land or to join in a sale of the land, and the necessity for an indemnity of creditors before legal proceedings could be commenced against Mrs. Passmore. Sub-section 109(6) of the Act was set out in full. The meeting was held and the resolution passed. Thereafter a form of indemnity was forwarded to all creditors under cover of a notice which included the following paragraphs: "4. A form of indemnity is enclosed for completion and return to my office on or before Friday the 25th day of September, 1981, by those creditors who are willing to indemnify me for the costs of the Proposed partition proceedings in the Supreme Court which involve, in effect, making an application for an Order that the property be sold. 5. If creditors are not prepared to indemnify the Official Receiver the bankrupt's interest in the house property could remain unrealised indefinitely. 6. I refer creditors to page 2 & 3 of my report dated 7th August, 1981 in which is set out the provisions of Section 109 (6) of the Bankruptcy Act which gives the Court the power to favour indemnifying creditors in the distribution of moneys which became available as the result of a successful action." Four creditors gave indemnities, namely James Neill (Australia) Pty. Ltd. trading as "Neill Tools", James Neill (Australia) Pty. Ltd. trading as "Thomas C. Brown & Co.", Burkett Industrial Equipment Pty. Ltd. and F.H. Prager & Co. Pty. Ltd. No other creditor of the bankrupt's estate provided any form of indemnification to the trustee. After receipt of the four indemnities, the Applicant commenced proceedings against Mrs. Passmore in the Supreme Court of Victoria claiming a declaration that Mrs. Passmore was compellable to make partition of the land and seeking an order for the sale of the land in lieu of partition and distrution of the proceeds among the parties interested. By way of aside, it is noted that the claim was based upon sections 221 and 222 of the Property Law Act 1958. It is somewhat surprising that no claim was based upon section 223 of that Act. After Mrs. Passmore had entered an appearance to the Supreme Court proceedings, a summons for final judgment was issued. Thereafter negotiations took place resulting in a compromise of those proceedings whereby the parties agreed to a sale of the land and a distribution of the proceeds between the parties interested. As a result of the sale the Applicant received the sum of $12,780.87. Mrs. Passmore paid the Applicant's costs of the Supreme Court proceedings. Questions have arisen as to whether the sum of $12,780.87 received by the Applicant is property which has been "recovered or preserved" by means of an indemnity for costs of litigation given by creditors under sub-section 109(6) of the Act. The Applicant has made application to the Court under sub-section 134(4) of the Act seeking directions on that question. If the direction is that the said sum has been so recovered or preserved the Applicant seeks orders under sub-section 109(6) of the Act. Notice of the application and the declaration and orders sought and the date of the hearing of the application was given to all creditors. No creditor has appeared to oppose the making of the declaration and orders sought. As mentioned earlier, the resolution passed at the meeting of creditors referred to the taking of legal proceedings "to realise the estate's interest" in the land. The notice however set out in full sub-section 109(6) and correctly included the words "recovered or preserved". In all the circumstances and in the absence of an appearance by any creditor I consider that none of the creditors have been mislead and the application of the Applicant should not be dismissed on this basis. Counsel for the Applicant contended that the question arose from what was said by Clyne J. in Re Bailey, unreported, 30 May 1946. A case note of that decision appears in 20 A.L.J. 155. There the facts were very different from the facts in the present case. There the Official Receiver had claimed and was paid moneys standing to the credit of Bailey in two bank accounts. Thereafter Bailey's son commenced proceedings in the Bankruptcy Court for a declaration that the moneys were his property. The Official Receiver defended the proceedings and for that purpose obtained an indemnity from a creditor of Bailey. The application was dismissed and thereupon the Official Receiver applied to the Court for directions as to whether the creditor was entitled under sub-section 84(2) of the 1924 Act to an order in his favour. Clyne J. refused the application. That sub-section referred to "recovered" only. His Honour said that in his opinion the word "recovered" meant received back again into one's own possession or obtained and could not mean the returning of what was already had. His Honour referred to section 69 of the English Solicitors Act of 1932 which enabled a Court to declare that a Solicitor in certain events was entitled to a charge on property "recovered or preserved through his instrument". His Honour said that the meaning of the words "or preserved" was clear. He said to hold what one already had was not to recover but to preserve. He suggested there was a defect in the 1924 Act. It is interesting to note that that defect was not cured until the year 1966. With all respect the decision by Clyne J. was correct. The Court is required to construe the words "recovered or preserved" appearing in the opening part of sub-section 109(6) of the Act. It is apparent that they are to be construed in the context of litigation. In that context the word "recover" signifies to recover by legal action, normally by the judgment of a Court. It is quite correct to refer for example to the recovery of damages for personal injuries even though the legal proceedings in which damages are sought result ina settlement being reached. In this context the word "recover" connotes the gaining of something. A reference to the many different meanings given to the word "recover" in the shorter Oxford Dictionary illustrate this use of the word. Among the meanings given are: "Ss. Law. To get back or gain by judgement ina court of law; to obtain possession of, or a right to, by legal process.late ME. b. To have (a judgement or verdict) given in one's favour 1768." The word "preserve" has no recognised legal significance. Essentially, the word means to keep safe from harm or injury, to take care of, to guard, to keep in one's possession, to retain a possession. Normally, in the context of litigation the word "preserve" connotes defensive action but it is easy to imagine a person initiating legal proceedings to preserve property, for example, by seeking a declaration relating to Property, by making application under the Settled Land Act 1958, seeking relief against waste or even by seeking probate of a will. In the present case counsel for the Applicant contended that on the facts of the application, the litigation was to preserve the property being the interest of the Applicant in the land. There are difficulties in accepting this contention and it is more desirable to consider the phrase "recover or preserve" as a composite phrase. The taking of action seeking partition of the land or a sale in lieu thereof does not necessarily connote the preservation of property but is more akin to recovering property. There is no doubt that the word "realise" has a meaning of converting property into money and in sub-section 109(10) of the Act as contained in the new s.109, the word has a meaning including the realisation of property being an interest in land into money as the result of legal proceedings being taken by a trustee in bankruptcy. However, the word "realise" was not included in s.109 prior to the 1980 amendment, thus it is not necessary to construe the word "realised" in the context of sub-section 109(10) of the Act. It is mot necessary to decide whether the property has been realised by means of an indemnity but even if it had been realised that does not necessarily deny that the property has been recovered by means of an indemnity for costs of litigation. It is necessary therefore to consider in more detail the application of sub-section 109(6) to the facts of this application. - 10 - In the Act, unless a contrary intention appears, the word "property" "means real or personal property of every description, whether situate in Australia or elsewhere, and includes any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property;". In the context of sub-section 109(6) the word property is to be given such a meaning. It is not to be limited to the recovery or preservation of property in specie. In the latter part of the sub-section reference is made to "the distribution of the proceeds of that property" and this seems to suggest that property which has been recovered or preserved may be in a form different to the original form of property. The Applicant and Mrs. Passmore were tenants in common in equal shares of the land. Each had an undivided moitey, each had a distinct share in the land but the land had not been divided between them. Each had aie separate interest to the other but none owned any particular part of the land. In the absence of agreement, the only way the Applicant could obtain possession of its right to its undivided moitey in the land was by legal process seeking partition or a sale in lieu thereof. In instituting legal proceedings, the Applicant was seeking to obtain possession of a right being his interest in the land. In the circumstances he could only obtain possession of that right by legal process. In this context it is quite correct to say that the Applicant was seeking to recover property. This is -ll- using the word "recover" in one of the specific meanings given to it by the Oxford Dictionary. The words "recovered or preserved" appear in various English Solicitors Acts and other legislation in England and there are numerous authorities where the words have been considered. A wide meaning has been given to them. The essential feature common to all the authorities is that the property must have been recovered or preserved in some action, matter or proceeding in a court of law. It has been held that real property is preserved by proceedings by which the will is validated for probate; Ex parte Tweed £1899] 2 Q.B. 167. Property does not cease to be recovered or preserved by legal proceedings where the property results from a compromise being entered into by the parties to the legal proceedings. In Australia orders have been made under sub-section 84(2) of the 1924 Act where property had been recovered as a result of a compromise of legal proceedings; see for example Re Bavistock (1946) 14 A.B.C. 30. It is interesting to note what was said by Harman J. in Wimbourne v. Fine £19523 1 Ch. 869 at pp. 873-5, particularly with reference to the word "preserved". For these reasons I am of the opinion that the said sum of $12,780.87 constitutes property recovered or preserved within the meaning of sub-section 109(6) in operation on 5 September 1980. Accordingly, the Court proposes to give the directions sought by the Applicant. - 12 - The condition precedent having been established, the Court is empowered to make "such order as it thinks just and equitable with respect to the distribution of the proceeds of that property with a view to giving the indemnifying ... creditors an advantage over other creditors in consideration of the risk run by ... them in giving the indemnity". It is not necessary to refer to the many authorities dealing with the nature of the discretion conferred by sub-section 109(6) and its application to particular facts; it is sufficient to refer to Re Ivermee; Ex parte Official Receiver (1979) 36 F.L.R. 187. A consideration of the authorities discloses that over the years the Courts have tended to adopt a more liberal approach in favour of creditors giving indemnities. There has been a tendancy to depart from the earlier approach of attempting to balance finally the degree of risk incurred by the indemnifying creditors and the proportion of the proceeds of the property recovered to determine what amount should be paid in priority among the indemnifying creditors; compare for example, Re Reid (1946) 13 A.B.C. 287. Nevertheless, as a first step, it is necessary to consider the risk incurred by the creditors who gave indemnities. In order to consider the risk, it is necessary to refer to the Supreme Court proceedings. The Applicant was the owner of a moitey of the land. Under 8.223 Property Law Act 1958, the Applicant would have been entitled to an order - 13 - for the sale of the land unless the Supreme Court saw good reason to the contrary. It is difficult to establish such good reason to the contrary, see: the discussion of earlier authorities in Schnytzer v. Wielunski (£19783 V.R. 418. At the time the indemnities were sought, the creditors should have assumed that the legal proceedings would include a claim based on 8.223, the section most favourable to the Applicant. Even on that assumption the indemnifying creditors did face some risk, albeit not great. All creditors were given notice and all except the four indemnifying creditors refrained from giving an indemnity. The four indemnifying creditors by accepting the risk of further expenditure are entitled to receive a benefit. In its application, the Applicant is seeking an order that the net amount of the sum of 612,780.87, after deduction of certain expenses, should be distributed among the indemnifying creditors. All creditors knew that the Applicant was seeking that order but none has appeared to oppose the making of an order in that form. Having regard to all the circumstances, in my opinion it is just and equitable that the Court should order that of the balance remaining of the sum of §12,780.87 received by the Applicant by means of indemnities for costs given by the four indemnifying creditors after the deduction of the necessary disbursements and fees referred to in the order and the Applicant's taxed costs of this application, two thirds be distributed preferentially pro rata among the - 14 - indemnifying creditors. This should enable each of those creditors to receive a substantial payment if not payment in full of their proved debts. SS SSE ET SS I certify that this and the THIRTEEN (13) preceding page: are a true copy of the Reasons for Judgment herein of the Honourable Mr. Justice RM NORTHRON ~ Associate Dated: 9 Mover ber 125%